But the hastily arranged deal has proved disastrous for once
resilient Lloyds, which has since received hundreds of billions in
state support and is now 43 per cent owned by the taxpayer.

Michael Fallon, Tory vice chairman of the Treasury Select Committee, called it 'the most expensive cocktail party in history'.

Lloyds is expected to lose money for the next two years due to
multiplying losses from reckless loans, while a threatened shareholder
revolt forced Sir Victor to resign earlier this week.

In a letter to shareholders, the ousted chairman - who will stand
down next year - warned that the EC could move to shrink the bank.

The price for EC approval would be 'likely to include the obligation
to reduce significantly the size of the group's balance sheet'.

This could be achieved by selling 'non-core' assets, such as its overseas operations.

However, the EC could order Lloyds to sell 'core' businesses, which
would be 'materially adverse' to its future prospects, Sir Victor
warned.

This raises the prospect that Lloyds could have to part with the
constituent parts of HBOS - its Halifax or Bank of Scotland
divisions - or its Scottish Widows insurance arm.

Lib Dem Treasury spokesman Vince Cable said: 'Lloyds can't remain at
its current size once it has been returned to the private sector, but
any forced premature deal would be bad for the British taxpayer.'

Fears that the EC will crush its dominant position in high street
banking triggered a 30 per cent crash in the Lloyds share price to
70.5p - from 100.3p at the start of the day.

But the value of the company did not fall by an equivalent amount
because the bank created more than ten billion shares yesterday.

This drove down the value of each existing share, but the overall value of the company only fell by 3 per cent.

A Lloyds carve-up would be welcomed by consumer rights groups, who
claim the size of the bank crushes competition in the banking industry.

The so-called Bank of Britain controls around 30 per cent of Britain's mortgage market.

Even if it doesn't enforce a break-up, the EC may impose stringent
restrictions on Lloyds due to its dominance of the High Street, the
bank said yesterday.

It could also ban the Government's insurance scheme for toxic bank
assets, which has taken high-risk loans worth £260billion from Lloyds,
Sir Victor said.

A Lloyds spokesman said: 'We're working closely with the Government
on this issue. We believe the success of our company is in the
interests of our shareholders, and the stability of the banking
system.'

City traders warned yesterday that Lloyds had compounded the effect
of its share price plunge by asking shareholders to buy the ten billion
new shares.

The move is designed to raise £4billion for Lloyds.

Sir Victor was writing to shareholders to drum up support for the scheme.